TL;DR
UK Life Insurance Choices How Our Level vs. Decreasing Term Calculator Helps You Decide Choosing the right life insurance can feel like a maze. With so many options, it's easy to get confused.
Key takeaways
- Best for: Covering debts that don't shrink, like an interest-only mortgage, or providing a lump sum for your family to live on, cover funeral costs, or pay inheritance tax.
- The Cost: Because the payout amount never goes down, premiums for level term policies are generally higher than for decreasing term.
- Illustrative estimate: If you pass away in Year 2, your family gets £200,000.
- Illustrative estimate: If you pass away in Year 24, your family still gets £200,000.
- Best for: Specifically covering a repayment mortgage or another large loan that you are paying off over time.
UK Life Insurance Choices How Our Level vs. Decreasing Term Calculator Helps You Decide
Choosing the right life insurance can feel like a maze. With so many options, it's easy to get confused. The most common choice you'll face is between two types of 'term' insurance: Level Term and Decreasing Term.
But what's the real difference? And more importantly, which one is right for you and your family?
That’s exactly why we created our handy Level vs. Decreasing Term Analyser. This powerful tool cuts through the jargon, showing you a clear, visual comparison to help you make a confident decision.
This guide will walk you through everything you need to know about these two popular policies, and how our calculator can light the way.
What is Level Term Life Insurance?
Think of Level Term insurance as a fixed safety net. You choose a cash lump sum (the 'sum assured') and a policy length (the 'term'). If you pass away within that term, your loved ones receive that exact cash sum.
The payout amount stays level from the first day to the last.
- Best for: Covering debts that don't shrink, like an interest-only mortgage, or providing a lump sum for your family to live on, cover funeral costs, or pay inheritance tax.
- The Cost: Because the payout amount never goes down, premiums for level term policies are generally higher than for decreasing term.
Worked Example: You take out a £200,000 level term policy over 25 years. (illustrative estimate)
- Illustrative estimate: If you pass away in Year 2, your family gets £200,000.
- Illustrative estimate: If you pass away in Year 24, your family still gets £200,000.
| Pros of Level Term | Cons of Level Term |
|---|---|
| Payout is fixed and predictable | More expensive than decreasing term |
| Good for family protection & living costs | You might be paying for more cover than you need in later years |
| Can be used for inheritance tax planning | Payout doesn't increase with inflation |
What is Decreasing Term Life Insurance?
Decreasing Term insurance (also known as 'mortgage life insurance') is designed for a specific job: to pay off a large, shrinking debt. The most common example is a repayment mortgage.
With this policy, the potential payout decreases over the term, usually at a similar rate to your mortgage balance.
- Best for: Specifically covering a repayment mortgage or another large loan that you are paying off over time.
- The Cost: Because the potential payout (and therefore the insurer's risk) reduces each year, premiums are typically cheaper than for a level term policy.
Worked Example: You take out a £200,000 decreasing term policy over 25 years to cover your mortgage. (illustrative estimate)
- Illustrative estimate: If you pass away in Year 2, the payout might be around £195,000, enough to clear the outstanding mortgage.
- Illustrative estimate: If you pass away in Year 24, the payout might only be around £10,000, matching the small remaining mortgage balance.
| Pros of Decreasing Term | Cons of Decreasing Term |
|---|---|
| Cheaper premiums | Payout reduces over time |
| Perfectly suited for repayment mortgages | Not suitable for providing family living costs |
| Ensures your biggest debt is paid off | If you remortgage for a larger amount, your cover might not be enough |
How Our Level vs. Decreasing Term Analyser Helps
Feeling clearer? Now let's put it into practice. Our Level vs. Decreasing Term Analyser is designed to give you a personalised snapshot of how these two policies compare based on your own figures.
How to use the calculator:
It's simple and takes less than a minute. Here are the steps:
Step 1: Your Inputs You'll need to enter a few key details:
- Amount of cover needed (£): This is the total lump sum you want. For a mortgage, it's your outstanding balance.
- Policy term (years): How long you need the cover for. This usually matches your mortgage term.
- Mortgage interest rate (%): This helps the calculator estimate how your decreasing term cover will reduce over time.
- Estimated Monthly Premium (Level Term): Enter an estimated cost. If you're unsure, you can start with a guess like £20.
- Estimated Monthly Premium (Decreasing Term): Enter an estimated cost, which will be lower than the level term one. Try guessing £12 to start.
Step 2: Your Outputs Once you hit 'Calculate', the analyser will instantly show you:
- A Visual Graph: This is the most powerful part. You'll see two lines. One flat line for Level Term, and one curved, downward-sloping line for Decreasing Term. This visually shows you how your cover amount behaves over the entire term for each policy.
- Total Premiums Paid: It calculates the total amount of money you would have paid for each policy by the end of the term.
- The Cost Difference: The tool highlights the total savings you'd make by choosing the cheaper option.
- A Clear Summary: A simple statement helps you understand the trade-off between cost and the level of cover.
Common Mistakes to Avoid When Choosing
Making the right choice is crucial. Here are some common slip-ups to watch out for:
- Mismatching the Policy to the Debt: Never use decreasing term cover for an interest-only mortgage. The debt on an interest-only mortgage doesn't reduce, so your cover shouldn't either.
- Underinsuring: Don't just pluck a figure out of the air. Think about your mortgage, other debts, and how much your family would need to live on. It's better to have a little too much cover than not enough.
- Choosing on Price Alone: Decreasing term is cheaper for a reason. If your goal is to leave a significant lump sum for your family's future, not just pay off the house, level term is likely the better, albeit more expensive, choice.
- Forgetting Inflation (illustrative): A £200,000 payout is worth a lot more today than it will be in 25 years. Level term provides a fixed cash amount, but its real-terms value will be eroded by inflation. Keep this in mind when deciding on your cover amount.
What to Do After You Get Your Result
The calculator gives you a brilliant, personalised illustration of the difference between the two policies. It helps you decide on the type of cover that best suits your primary goal.
Your next step is to get real quotes.
The premium estimates are just that—estimates. The actual price you pay will depend on several personal factors:
- Your age
- Your health and medical history
- Your lifestyle (e.g., whether you smoke)
- The exact cover amount and term
This is where an expert broker like WeCovr can be invaluable. We don't just give you a price; we search the market to find the right policy for your circumstances from a panel of leading UK insurers.
Connecting Your Protection: Life Insurance and Private Medical Insurance
Life insurance protects your family's finances if you're no longer around. But what about protecting your own health while you are? That's where Private Medical Insurance (PMI) comes in.
PMI is designed to work alongside the NHS, giving you faster access to eligible treatment for acute medical conditions. An acute condition is a disease, illness, or injury that is likely to respond quickly to treatment.
It’s important to understand that UK private medical insurance policies are designed to cover new, acute conditions that arise after you take out the policy. They do not cover pre-existing conditions you already have, or chronic conditions like diabetes or asthma that require long-term management rather than a cure.
- To learn more about getting quicker access to healthcare, explore our guide on Private Medical Insurance.
- For a broader look at all your life cover options, visit our main Life Insurance page.
At WeCovr, we can help you find competitive quotes for both. What's more, customers who purchase life insurance or PMI through us can often get discounts on other types of cover and receive complimentary access to CalorieHero, our exclusive AI-powered calorie and nutrition tracking app, to help you stay on top of your health goals.
Frequently Asked Questions (FAQs)
Q: Can I have both a level and a decreasing term policy? A: Yes, absolutely. Many people do this. You could have a decreasing term policy to cover the mortgage and a smaller, separate level term policy to provide a cash lump sum for your family's living expenses.
Q: What happens if I outlive my policy term? A: If you reach the end of your policy term and haven't made a claim, the cover simply stops. There is no payout and you don't get your premiums back. This is how term insurance is able to be so affordable.
Q: Is the life insurance payout tax-free? A: The lump sum from a life insurance policy is typically paid free of inheritance tax. However, to ensure this, it's highly recommended that you write your policy 'in trust'. This is a simple legal arrangement that separates the policy from your estate, making the payout quicker and ensuring it goes directly to your beneficiaries without being subject to inheritance tax. We can help explain this process.
Your Next Step: See for Yourself
Knowledge is power, especially when it comes to your family's financial security. The choice between level and decreasing term life insurance depends entirely on what you want to protect.
Stop guessing and start seeing the facts.
Use our free Level vs. Decreasing Term Analyser today to get a clear, visual comparison based on your numbers. Once you know which policy type fits your needs, contact WeCovr. Our friendly team will compare quotes from across the market to help you secure the right protection at a great price.
Sources
- Office for National Statistics (ONS): Mortality, earnings, and household statistics.
- Financial Conduct Authority (FCA): Insurance and consumer protection guidance.
- Association of British Insurers (ABI): Life insurance and protection market publications.
- HMRC: Tax treatment guidance for relevant protection and benefits products.
